the fed's instant payments system fednow is already encountering roadblocks

After years of development, the Federal Reserve’s new instant payments system called FedNow officially went live this week. The system promises to fundamentally alter how money moves through the banking system, making real-time payments accessible for the first time for thousands of banks and credit unions of all sizes across the country.

FedNow will allow financial institutions to transfer funds in seconds around the clock, every day of the year. In the current system, payments between institutions typically take one to three business days to clear. With FedNow, funds will be available to recipients immediately upon authorization of the payment.

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This shift to instant payments will enable greater flexibility and efficiency for both individuals and businesses. Consumers will be able to immediately access paychecks, reimbursements, and government benefits.

Businesses will be able to make and receive payments with more agility, managing cash flows in real time. For those living on tight budgets, instant access to funds could help avoid overdraft fees and payday loans.

“The Federal Reserve built the FedNow Service to help make everyday payments over the coming years faster and more convenient”, commented the Chairman of the Fed, Jerome Powell, in the official press release that announced the launch of the payments system

He added: “Over time, as more banks choose to use this new tool, the benefits to individuals and businesses will include enabling a person to immediately receive a paycheck, or a company to instantly access funds when an invoice is paid.”

Large Banks May Be Reluctant to Adopt FedNow as It Hurts Their Businesses

While 35 financial institutions have been certified to initially use FedNow, adoption is likely to be gradual as banks invest in updating their systems and customer interfaces. Critics note that some large banks are absent from the initial participant list, potentially slow-walking the system to protect existing revenue streams.

The Fed created FedNow to expand access to instant payments, which is currently limited to a real-time network run primarily by large banks. FedNow aims to level the playing field by giving smaller banks and credit unions the same capability. However, some banks may choose to use both FedNow and existing real-time networks to ensure fast payments reach as many customers as possible.

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While FedNow promises many benefits, some potential drawbacks have been raised. Revenue for banks that rely heavily on card fees could decline as customers shift to real-time payments.

Around-the-clock availability may also require higher investments in monitoring systems to guard against cyberattacks. Instant withdrawals could exacerbate bank runs in a crisis.

For consumers, FedNow’s impact will largely depend on whether their bank opts in. Those without bank accounts will be unable to use the system. FedNow also operates differently from apps like Venmo and Zelle, handling payments directly between bank accounts rather than using intermediaries.

The Federal Reserve views FedNow as critical infrastructure for the U.S. payments system, akin to the role it already plays in overseeing checks and wire transfers.

If successful, FedNow could accelerate the adoption of instant payments for consumers and businesses, helping create a more efficient money flow in the U.S. economy. But its rollout is just beginning, and the challenges of changing entrenched banking habits and revenue models remain.

Zelle and Venmo are Direct Competitors to FedNow

market share of each payment method

According to statistics compiled by the fintech-focused recruitment website Storm2, around 40% of Americans relied on credit cards to make their everyday payments while cash was the second most popular payment method.

Meanwhile, the payments market reportedly reached a value of $1.2 trillion in 2022 with digital payments rapidly becoming one of the most popular choices among consumers to transfer money to third parties.

Some popular systems have emerged lately to provide free instant payments to consumers. This is the case of Zelle, a platform that works with a network of banks to offer this service. Other third-party apps that are used by Americans to this end include PayPal and Venmo.

In the case of Zelle, the software is typically integrated into the institution’s mobile banking service. Meanwhile, platforms like Venmo require that users register and set up separate accounts on their platform to access the service.